Introduce Roths to the younger generation

Believe it or not, even teenagers can take advantage of tax-saving retirement plans.

Strategy: Have your child contribute part of his or her summer wages to an IRA. The savings can build up tax-free over time into a sizable nest egg.

Even better: Opt for a Roth IRA for greater after-tax savings.

You can’t deduct Roth IRA contributions as you can with a traditional IRA contribution. But the tax deduction won’t do your child much good this year, anyway, in his or her low tax bracket. On the other hand, future distributions from a Roth IRA may be tax-free.

Example: Your 15-year-old daughter earns $3,000 from babysitting and odd jobs this summer. She contributes the $3,000 to an IRA. To keep it simple, let’s say she continues to make annual $3,000 contributions, and the funds earn 8 percent a year.

Assuming that your daughter will be in the 28 percent federal income tax bracket when she reaches age 60, she’ll receive an after-tax distribution of $999,209.

But she could pull $1,252,278 tax-free— $253,069 more—from a Roth IRA. (Use an online calculator, such as the one at www.statefarm.com/jscript/iracalc2.htm, for your own situation.)

If your daughter isn’t inclined to contribute her babysitting money to any IRA, you can help her out. Give her the $3,000 this year, and let her handle the money. It doesn’t matter if you’re the one actually supplying the cash for the contribution.

You can even fund a Roth IRA for a child who isn’t working yet. Suppose your mother watches your infant child for you and your spouse. You pay Mom for her babysitting services, so she can set up a Roth IRA—naming your child as the beneficiary—and contribute to it within the annual limits.

Distributions can ultimately be stretched out over the child’s life expectancy

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